Energiekamer cost of capital validation 2010

In 2010, Energiekamer was preparing for the next regulatory period of price controls covering electricity and gas distribution networks and TenneT, the electricity transmission and system operator, in the Netherlands.

Before reaching its final determination on the level of prices for the next period, Energiekamer published its draft method decision, setting out its position on different sections of the price control. Energiekamer estimated a pre-tax weighted average cost of capital, using CAPM to set the cost of equity. Stakeholders were given the opportunity to comment on the draft method decision.

Energiekamer commissioned Reckon to provide a second opinion on the WACC elements of the draft method decision. We carried out a review of the method and calculation of the WACC determination in Energiekamer's draft method decision and provided an assessment of potential vulnerabilities. We also reviewed stakeholder comments concerning the draft determination. We provided a view on the reasonableness of stakeholder comments and a justified critique where appropriate. We drew on our knowledge and experience of cost of capital issues as part of price control regulation and further research, as needed, of regulatory precedent, previous studies on the cost of capital and corporate finance textbooks.

We identified concerns with the method for establishing the market risk premium and provided an explanation of this view to Energiekamer. We developed a response to a stakeholder's comments on the treatment of systematic (or diversifiable) risk and non-systematic risk in estimation of the equity beta.